Flexible Compensation: Improve Employee Satisfaction without increasing costs for your company

In times when it is difficult to increase workers’ salaries or to assume more costs at the corporate level, flexible remuneration can be an option to increase the profitability and efficiency of processes. This type of remuneration allows employees to choose how much of their gross salary they want to allocate to the consumption of a series of products or services at a cheaper price than those available on the market.

With flexible remuneration plans, both the employer and the employee obtain benefits. On the one hand, the individual can obtain interesting tax reductions. The employee will see how his gross salary will perform better than before applying this remuneration. On the other hand, the company gets its employees to be more satisfied with their working conditions without having to assume an extra cost to achieve it.

Differences between flexible remuneration and social benefits

Flexible compensation is often confused with employee benefits. Although both types of compensation are considered income in kind, they have certain characteristics that differentiate them.

When we talk about social benefits, we are referring to the remuneration in kind that the company offers to its employees. These benefits are fully paid for by the company and are independent of the employee’s salary in cash. Social benefits are usually linked to the collective bargaining agreement to which the company is subject.

On the other hand, flexible remuneration allows employees to allocate part of their salary to the consumption of services and products in order to benefit from tax exemptions.

With these two definitions we can establish a series of differences that will help us to distinguish between the two concepts. Firstly, while social benefits are established by a collective agreement, flexible remuneration is voluntary. The company makes the possibility available to its employees and it is up to them to decide whether or not to take advantage of it. Another difference is that flexible compensation is always dependent on gross salary. As we will see below, one of the characteristics of flexible remuneration is that it cannot exceed 30% of the employee’s salary. In the case of social benefits, these are independent of salary. Finally, the company is responsible for paying the social benefits, which means an extra cost per employee. In the case of flexible compensation, however, the company does not have to bear any additional costs.

How flexible compensation affects the payroll

To understand the process by which flexible compensation allows employees, despite having the same gross salary, to receive a higher net salary. To illustrate this situation let’s go to a practical case.

Lucia and Roberto work together in the same company. Both have equal working conditions. They both have a gross salary of 35,000 euros per year. There is only one thing that differentiates them: Roberto has decided to take advantage of the flexible compensation plan offered by his company. While Lucia does not want to receive any payment in kind, Roberto has decided to use part of his salary to pay for health insurance, restaurant tickets and childcare.

This example explains how, with the same salary and cost to the company, Roberto manages to receive €156.32 more per month. Allocating part of the gross salary to pay for these services reduces the taxable base for personal income tax (IRPF). It also reduces the percentage of withholding in this tax. The result of all this is that, despite receiving the same gross salary as her partner, the net salary is higher.

Legislation for flexible remuneration in Spain

The legal framework for flexible remuneration consists mainly of two laws:

• Law 35/2006, of 28 November, on Personal Income Tax and partial modification of the laws on Corporate Income Tax, Non-Resident Income Tax and Wealth Tax.
• And Royal Decree 439/2007, of March 30, which approves the Personal Income Tax Regulations and modifies the Pension Plans and Funds Regulations, approved by Royal Decree 304/2004, of February 20.

Flexible remuneration is one of the forms of payment in kind contemplated in the Spanish legal system. As we have discovered in this article, it has a very favorable tax treatment both for the employees, to whom it allows them to get a higher return on their gross salary, and for the companies, which see increased employee satisfaction without having to increase costs. However, for this type of remuneration to be considered as flexible remuneration, a series of requirements must be met:

• Flexible remuneration must be a maximum of 30% of the employee’s total salary. It may not reduce the amount of money to be received equivalent to the minimum interprofessional wage (SMI).
• There are no variations in the contribution base of a worker who makes use of the remuneration. There is only a reduction in the IRPF.
• It will have to be an agreement between the company and the worker. No company will be able to force the worker to make use of the flexible remuneration, with the exception of the cases in which it is established by a regulation or labor agreement.
• Expenses derived from direct professional activity are excluded. For example, a business trip cannot be disguised as flexible remuneration.

Do you need help with your company’s labor management?

At Vasalto, we are experts in payroll. We specialize in helping other companies with services such as managing the hiring and dismissal of workers, outsourcing payroll and all processes related to labor relations management. Our more than 30 years of experience have given us a great expertise in the sector. In addition, we are a company very involved with technology. Throughout these years we have developed a series of proprietary computer systems that allow us to manage more than 40,000 payrolls every month. In addition, we also have the best legal and accounting advice to offer our clients the best possible service.

At Vasalto, we believe that communication between people is fundamental. We make technology available to people, never the other way around. We work with technological automation solutions so that IT takes as much work off our hands as possible. This way, we have more time to dedicate to our customers.

If you are interested in learning more about flexible compensation or any issue related to payroll or accounting for your company, at Vasalto we will be happy to help you. Contact us to get to know us and see how we can help your company.